At a meeting of the National Association for Business Economics in Philadelphia yesterday afternoon, the Fed chairman said that in the absence of government data, Federal Reserve bank and private data is being used to monitor the economy. The result is a familiar one—the outlook for both inflation and employment is relatively unchanged compared with when the Federal Open Market Committee (FOMC) met last month.

In the second half of the year, fear has been rising that the two parts of the Fed’s mandate—inflation at 2% and stable employment—may be in tension with each other, with inflation demanding higher rates to cool the economy and bring down prices, while slowing jobs growth would require lower rates in order to foster economic activity.

Members of the FOMC had hinted that after weighing inflation as the more pressing side of the problem for some time, they were now rebalancing their view. Powell suggested the employment side had weakened further, saying: “While the unemployment rate remained low through August, payroll gains have slowed sharply, likely in part due to a decline in labor force growth due to lower immigration and labor force participation. In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen.”

He added that while official data from the Bureau of Labor Statistics is delayed given the government shutdown, “available evidence suggests that both layoffs and hiring remain low, and that both households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue their downward trajectories.”

And even while Powell—the subject of the president’s ire this year for not cutting rates as soon as he would have liked—reiterated that inflation in the near term remains sticky at near 3%, he did note that “most longer-term expectation measures remain aligned with our 2% goal.” Analysts may have particularly liked this because it suggests that Powell is willing to “look through” tariff-related inflation, which is expected to hit in the coming months, but discount it from the trajectory of monetary policy as a one-off hit to prices.

While the chairman added that “we will set policy based on the evolution of the economic outlook and the balance of risks, rather than following a predetermined path,” investors heard enough of what they wanted to remain bullish on further cuts—reason to celebrate as lower rates mean cheaper borrowing for businesses and consumers. According to CME’s FedWatch barometer, the likelihood of a 25-basis-point cut at the Fed’s October meeting is now at nearly 96%, up from 94% a week ago.

But the confidence didn’t last for long. Deutsche Bank’s Jim Reid noted to clients this morning: “It’s certainly been quite a ride in markets since Friday’s trade escalation, with many sentiment shifts in the subsequent two to three days. The last 24 hours has been a microcosm of that with the S&P 500 (–0.16%) only slightly lower after rallying hard from lows of around –1.5% just after the open and then bouncing off the highs of around +0.4% a couple of hours before the New York close. The rally back was caused by dovish comments from Fed Chair Powell after Europe went home, but a late social media post from President Trump reignited some fears of U.S.-China escalations.”

Gathering clouds on China

Markets are a mixed bag before the bell this morning as investors digest the good news from Powell and the alarming update from President Trump. S&P 500 futures were up 0.59% this morning after the index closed down 0.16% yesterday; the Nasdaq Composite was down 0.76%. Conversely, the Dow Jones was up 0.44%. Markets across Europe are all marginally up: Germany’s DAX is up 0.23%; Paris’s CAC 40 is up approximately 2.5%; and the Euro STOXX 50 is up 1.45%. In Asia, the Nikkei 225 and Hang Seng Index were both up more than 1.7%.

But perhaps the most notable shift was the VIX volatility index, which spiked 3% late yesterday. Investors’ expectations of increased volatility likely came (as is becoming a trend) in the form of President Trump’s social media.

Trump posted on Truth Social last night: “I believe that China purposefully not buying our soybeans, and causing difficulty for our soybean farmers, is an economically hostile act. We are considering terminating business with China having to do with cooking oil, and other elements of trade, as retribution.”

Talk of retribution is precisely the opposite of what markets had hoped for, and is a further about-turn from the White House on relations with Beijing. On Friday, Trump threatened 100% tariffs on its key trading partner, before issuing assurances that a deal will be reached. It comes as the latest export data for China shows Washington may not have as strong a hand as it believed in the trade war, with Chinese exporters reporting growth, having focused on trade with the rest of the world as opposed to the States.

Here’s a snapshot of the markets this morning:

• S&P 500 futures were up 0.59% this morning prior to the opening bell in New York. The index was down 0.16% yesterday.
• The STOXX Europe 600 was up 0.66% in early trading. 
• The U.K.’s FTSE 100 was down 0.2%. 
• Japan’s Nikkei 225 was up 1.76%.
• China’s CSI 300 was up 1.48%. 
• The South Korea KOSPI was up 2.68%. 
• India’s Nifty 50 was up 0.68%. 
• Bitcoin was flat at $112,643.